Morgan Stanley warns on sagging growth in Asia

By Amber Chung / STAFF REPORTER

Wed, Jan 04, 2006 - Page 10

Export-oriented Asian countries may experience decelerating growth in the coming decade, as the global economic powerhouse, the US, could see slowing momentum due to the country's massive trade deficit and low bond yields, Morgan Stanley warned yesterday.

Rising trade deficits accounted for 38 percent of US import growth under Greenspan. Meanwhile, the US 10-year treasury yield dropped to 4.5 percent from 8.5 percent, according to the investment bank.

The declining bond yield justified rising prices of US stocks and property, which have given the country's consumers high confidence. They demonstrated that confidence by consuming more than they earn, and such strong consumption has in turn sustained investors' confidence about the future, Xie said.

However, the cycle of rising asset prices and strong growth is running into two headwinds, he said.

First, the US bond yield is now so low that further decline is likely to trigger fear of deflation rather than optimism about price stability. Hence, a loose monetary policy that keeps liquidity high and bond yields low may be counterproductive, the economist said.

Second, the US trade deficit has become so large that the country's excess demand may ignite fears of a dollar collapse rather than optimism about US demand growth, Xie added.

As a result, the large US trade deficits and the low US bond yield are signaling the end of the stimulus era, which could mean a slowdown in economic growth in the decade ahead for export-oriented Asian countries which have developed rapidly on strong US demand, the economist said.

Greenspan, 80, is to retire at the end of this month, ending his 18-year Fed chairmanship. He will be replaced by the 53-year-old Ben Bernanke, who is also a member of the Fed's Board of Governors.

However, the tasks facing Bernanke will not be easy to accomplish, according to Xie. The free flow of capital around the globe has fueled a global property bubble.

Should that bubble burst, which Xie believes will happen, Bernanke will have to handle the aftermath carefully to prevent a backlash against globalization.